Kerrisdale On Short Case For UnilifeVW Staff
We believe that shares of Unilife Corp (NASDAQ:UNIS) are more than 75% overvalued as investors have once again over-reacted to deal announcements heavy on lofty potentials but light on detail. In a sequence reminiscent of the 2003 and 2009 episodic pops in Unilife's price, shares climbed by over 50% following the announcement of a new supply agreement with Hikma Pharmaceuticals Plc (LON:HIK) (OTCMKTS:HKMPY). The stock appreciated a further 17% on December 3rd after Unilife reported a nebulous supply arrangement with Novartis. While the Novartis AG (ADR) (NYSE:NVS) arrangement offers nothing in guaranteed revenue, the Hikma agreement promises $5m of upfront cash. Unilife is also eligible for a $15m payment in 2014, assuming certain milestones are met, and another $20m from Hikma in 2015. At a discount rate of 10%, the present value of these payments is just $35m. This is just one-sixth of the $210m market capitalization gain Unilife has realized in the days following the announcement.
The market appears to have attributed $175m, or more than $1.70/share, to hypothetical future product sales to Hikma Pharmaceuticals Plc (LON:HIK) (OTCMKTS:HKMPY) and Novartis. Sellside analysts, whose firms are typically enriched by Unilife Corp (NASDAQ:UNIS)'s frequent share issuances, have focused on the minimum unit volume figures reported in the Hikma announcement (the Novartis arrangement doesn't include volume targets). However, we were surprised to see that Hikma itself failed to mention specific volume targets in its own press release. Given the discrepancy, we question whether the volume targets actually represent a guaranteed revenue stream, or if instead, this is merely a minimum buying threshold that Hikma must fulfill to maintain exclusivity. We ask the question because Unilife's volume targets for Sanofi SA (ADR) (NYSE:SNY)'s Lovenox only relate to exclusivity: “After the completion of the 4-year ramp-up period, Sanofi would be required to purchase a minimum of 150 million units per year from Unilife to maintain their exclusivity” (FQ4 2013 call).
An extreme degree of skepticism is warranted because Unilife Corp (NASDAQ:UNIS) has a long history of over-promising, missing production deadlines, and disappointing its investor base. This narrative extends back to January 2004 when Unilife gave assurances that 65 million retractable hypodermic needles would be “pouring off an imported assembly line” within months.